It's time to revisit and revise India's money laundering laws

While the furore over the alleged piracy by Vijay Mallya, Nirav Modi and Mehul Choksi on the turbulent seas of India’s banking industry rages on, the battle for restitution of public money is going full throttle. However, lost in focus, and probably discounted as collateral damage, are the businesses that parleyed with these now infamous men of commerce.

Law enforcement is focussed on dealing with the Modis and the Choksis. However, once the investigation is completed and the witch-hunt begins, banks and financial institutions that were - at one time - happy to deal with prominent businesses set up by alcohol barons and diamond billionaires, will feel the wrath. This is most likely to be channelled through the Prevention of Money Laundering Act, 2002 (PMLA).

PMLA is special legislation enacted with the righteous intention of dealing with the menace of money laundering. One of its key objectives is to empower the central government to confiscate and appropriate properties acquired by money launderers with “dirty money”. This is to ensure that any property that falls within the definition of “proceeds of crime” should be confiscated so that the fruits of crime are not enjoyed by a money launderer.

The question is - what constitutes “proceeds of crime”? For instance, consider a situation where a business house took a loan from a private bank in 2010 and offered as security a bungalow purchased by them. However, the business house was not in a position to repay its loan and was declared by the bank to be a non-performing asset in 2014. It is subsequently discovered in 2018 that the business house was engaged in the manufacture of narcotic drugs and its income is derived from illegitimate sources.

Proceedings are initiated by the Enforcement Directorate (ED) under PMLA to recover properties purchased by this business house with drug money. Does this mean that the bungalow that was secured against a regular loan facilitated to a seemingly financially stable business would fall within the scope of “proceeds of crime”?

If the current trend being adopted while attaching properties in proceedings under PMLA is analysed, the answer is clear - almost every property the accused business house has acquired would fall within the scope of “proceeds of crime”. It would appear to be of little consequence whether there is any allegation of wrongdoing on the part of the bank, because the bank must face legal proceedings under PMLA.

One might argue, as many people do today, that banks must face the consequences of their own inaction and negligence and that they cannot be exempt from scrutiny since they are significant dramatis personae in the saga. To pre-empt such naysayers, let’s revisit our example above and add another layer. Since the business house was declared a non-performing asset in 2014, the bank held an auction in 2016 to sell the bungalow and recover whatever amount they could. In such an auction, you saw a great property being sold on distressed value and you purchased the bungalow. How would you like it when the long arms of the PMLA catch up with you a couple of years later?

Such is the plight of asset reconstruction companies today. A large part of their business is buying such non-performing assets from banks and alleviating the pain caused to a bank because of these bad loans. In return, these asset reconstruction companies obtain stressed properties in the hope that market conditions will turn and these will generate some profit. Amplifying the pain of such companies is PMLA, which provides for harsh measures to be taken against properties suspected to have been acquired with the “proceeds of crime”.

If the ED, while investigating money laundering charges, has “reason to believe” that any property has been acquired from the “proceeds of crime”, it has the power to issue a provisional attachment order. This allows the ED to attach all such properties acquired from illegal monies for a period of six months. A formal complaint is required to be filed by the ED within 30 days from the date of the provisional attachment order and proceedings are required to be initiated before the adjudicating authority. In the proceedings, the authority is required to either confirm or set aside the provisional attachment order within the six-month time period. In case it is confirmed, a full trial before a special court is required and the attachment continues.

There are certain checks and safeguards in place to ensure that the innocent are not vilified and subject to criminal trial under the PMLA. These safeguards include a requirement on part of the ED to provide “reasons to believe” that the properties being attached have actually been acquired with income generated from crime. However, in most situations, statutory requirements such as “reasons to believe” for attachment and evidence of criminal activity lay forgotten. In the process, banks, asset reconstruction companies, innocent third-party purchasers get caught in the crosshairs of the PMLA. Sometimes, in the complaint filed before the adjudicating authority, there is not even a whisper of wrongdoing on their part. Their only fault is that they have rights over a property that may have been once acquired by a criminal with his illegitimate income.

The adjudicating authority is cognizant of the gargantuan task heaped on the Enforcement Directorate and may be sometimes hesitant to let a perpetrator escape the clutches of the law, that too without a trial. Therefore, guilty or innocent, the road to justice under PMLA is long and arduous.

The PMLA needs revisiting and requires adjustments, lest it further weakens the country’s commerce. In the current scheme of things, the misuse of PMLA is reminiscent of an ancient Roman phrase - “Solitudinem faciunt, pacem appellant” - which loosely translates to: they create desolation, and call it peace.

About the Author

Samudra Sarangi is a Partner with the Law Offices of Panag and Babu. He is a commercial litigator with a special focus on money laundering laws in India. This article is website-exclusive and cannot be reproduced without permission.